New Oriental Education & Technology Group - Q3 2023

Transcript

Operator (participant)

Good evening and thank you for standing by for New Oriental's FY 2023 third quarter results earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be Q&A session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead.

Sisi Zhao (Investor Relations Director)

Hello, everyone, and welcome to New Oriental's third fiscal quarter 2023 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on newswire services. Today, Stephen Yang, Executive President and Chief Financial Officer, and I will share New Oriental's latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. Our results may be materially different from the view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC.

New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead.

Stephen Yang (Executive President and CFO)

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. It's our great pleasure to announce that upon the completion of the restructuring process and the introduction of our new businesses, we have managed to deliver a set of remarkable financial results this quarter, with both top line and bottom line beating the expectations. The result is also boosted by the macro trends of economy recovery as the pandemic subsides. Business activity is resuming and people regain their confidence in consumption. While we observe the demand for our products and services is gradually increasing, we have also achieved a GAAP operating margin and non-GAAP operating margin of 8.8% and 11.7% respectively for this quarter. Our key remaining business have continued to demonstrate solid recovery.

In particular, our overseas test prep and overseas study consulting business have performed exceptionally and recorded continuous year-over-year revenue increments, thanks to the strong post-COVID recovery across the world. Our restructured business model, streamlined cost structure, coupled with the emerging new business, have not only helped us yield better-than-expected margins in this fiscal quarter, but also effectively diversify our business and enable us to offset certain historical seasonality. As we head into the fourth quarter, our solid profitability, strong performing remaining business lines, and emerging new business initiatives in this quarter reaffirm our belief in sustaining a healthy growth of our market share and pursuing innovative endeavors as we restlessly sail the encouraging environment of recovery. I'd like to spend some time to talk about the quarter's performance across our many business lines and new initiatives to you in detail.

Our key remaining business got a promising trend, and the new initiatives have shown positive momentum. Breaking it down, the overseas test prep business recorded the revenue increase of 13% in dollar terms or 23% in RMB terms year-over-year for this quarter. The overseas- of about 5% in dollar terms or 13% in RMB terms year-over-year for this quarter. The adults and university students business recorded the revenue decrease of 3% in dollar terms or 5% increase in RMB terms year-over-year for this quarter. As mentioned in the previous quarters, we have also launched several new initiatives which mostly revolve around facilitating students or around development. I'm glad to share with you that these new initiatives have continued to exceed our expectations by sustaining a positive momentum and generating meaningful profits to the group.

First, the non-academic tutoring courses which we have offered in focuses on cultivating students'. 118,000 student enrollment recorded in this quarter. The top 10 cities in China have contributed about 60% of the revenue of this business. Secondly, the intelligent learning system and device business is a service designed to provide a tailored digital learning experience for students. It utilize our past teaching experience, data, technology, to provide personalized targeted learning and exercise content. Our continuous investments in technology has built a competitive edge, which drives our navigation amidst the challenges from the past year. We have tested its adoption in around 60 existing cities with 108,000 active pay users in this quarter, and are delighted to see improved customer retention and scalability of this new business.

The revenue contribution from the top 10 cities in China is around 60%. Meanwhile, the study tour and research camp business is an initiative that aims at offering students of K-12 and university ages the opportunity to fully leverage their free time to broaden the scope of knowledge and cultivate subject interest. We have conducted the study tour and research camps in over 50 cities across the country. The revenue contribution from the top 10 cities in China is over 55%. Last but not least, our smart education business, which comprises smart teaching, smart hardware, science, technology, innovation, education, and other services, serves the local governments, education authorities, schools and kindergartens.

Our education materials and digitalized smart study solutions, a self-learning system which leverages the advanced technology enable the students to have complete control over the pace and flexibility of learning in an age where remote learning becomes increasingly mainstream. We also offer exam prep courses designed for students with junior college diplomas to obtain the bachelor's degrees. The above-mentioned business have been gaining wide traction and contributes the overall growth of the company, and has attained instrumental profits since the last quarter. With regards to our OMO system, we continued our efforts in developing and revamping the platform, and kept leveraging our educational infrastructure and technology strengths over our remaining key business and new business to provide more advanced and diversified educational service for our customers.

During the reporting period, we invested $26.8 million in the quarter to further improve and maintain our OMO teaching platform. Now, I'd like to give you all an update on East Buy's latest performance. During the reporting period, East Buy has proved itself as a successful business model with instrumental breakthroughs in both business operations and financial performance. The business has continued to offer a remarkable contribution to the company's overall revenue and profit growth. East Buy continued to invest substantial resources in improving product quality and variety under its private label, uncertain and its customer-centric strategy and content caliber during the reporting period. East Buy remains rigorous in applying stringent standard in supplier selection to only source products of top-notch quality and safeguards active collaborations with SF Express and JD Group to continuously refine delivery process and service.

To set itself apart from conventional live streams, East Buy also upholds its unique feature of integrating intelligence, dissemination alongside product sales, with a vision to foster nationwide cultural and knowledge sharing. The series of the East Buy's in-person live streaming and participation in cultural documentaries and exhibitions have not only increased traffic to East Buy's platform and boosted sales, but also elevated audience engagement and awareness on the preservation of Chinese culture resources. It's inspiring to see that East Buy has grown significantly since inception, and has not only become a well-known platform for promoting healthy, top-quality, and cost-effective products with loyal customer base, but also advocates appreciation of the country's cultural assets for the betterment of the community.

With regards to the company's latest financial position, I'm confident to share with you that the company is in a healthy financial status, with cash and cash equivalents, term deposits, and short-term investments totaling approximately $4.3 billion. On July 26, 2022, the company's board of directors authorized the share repurchase of up to $100 million of the company ADS or common shares during the period from July 28, 2022 through May 31, 2023. As of April 18, 2023, the company repurchased an aggregate of approximately $5.1 million ADS for approximately $157.6 million from the open market under the share repurchase program. Now, I will turn the call over to Sisi to share with you about the key financials.

Sisi, please go ahead.

Sisi Zhao (Investor Relations Director)

Okay. I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $687.7 million, representing a 9% decrease year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $666.3 million, representing an 8.1% decrease year-over-year. The decrease was primarily due to the reduction of facilities and number of staff as a result of the downsizing in the fiscal year 2022. Cost of revenue decreased by 0.9% year-over-year to $369.6 million. Selling and marketing expenses increased by 9.5% year-over-year to $102.6 million.

G&A expenses for the quarter decreased by 25.4% year-over-year to $215.5 million. Non-GAAP G&A expenses, which includes share-based compensation expenses, $194.5 million, representing a 25.1% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 28.6% to $21.4 million in the third fiscal quarter of 2023. Operating income was $66.5 million, representing a 147.1% increase year-over-year. Non-GAAP operating income for the quarter was $87.9 million, representing a 179% increase year-over-year. Net income attributable to New Oriental for the quarter was $81.6 million, representing a 166.7% increase year-over-year.

Basic and diluted net income per ADS attributable to New Oriental were $0.49 and $0.48 respectively. Non-GAAP net income attributable to New Oriental for the quarter was $95.4 million, representing a 199.9% increase year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.57 and $0.56 respectively. Net operating cash flow for the third fiscal quarter of 2023 was approximately $190.5 million, and capital expenditure for the quarter were $49.2 million. Turning to the balance sheet. As of February 28, 2023, New Oriental has cash and cash equivalents of $1,329.5 million.

In addition, the company has $1,413.5 million in term deposits and $1,568.1 million in short-term investments. New Oriental's deferred revenue balance, which is the cash collected from registered students for courses and recognized proportionally as revenue as the instruction was delivered. At the end of the third fiscal quarter of 2023 was $1,163.2 million, an increase of 19.8% as compared to $971.3 million at the end of the third fiscal quarter of fiscal year 2022. I'll hand over to Stephen to go through our outlook and guidance.

Stephen Yang (Executive President and CFO)

Looking ahead to the fourth quarter, which has historically been one of our seasonal peak quarter. Our key remaining business are in the process of recovery with the opportunity of further taking up market share as the pandemic subsides. As usual, the company remains tireless in seeking new opportunities with greater flexibility and strong cash flows. We are confident in embarking on an all-around journey that ensures sustainable growth. For our new businesses, the encouraging performance that these businesses have achieved in the previous quarters proves that we are heading towards the right direction. We firmly believe that business will sustain a healthy growth and generate meaningful profit to the company in the fourth quarter and going forward.

With regards to the learning center and classroom space, we're planning to increase our capacity moderately, at which we expect a small quantity of the new learning centers will be opened and classroom areas of some existing learning centers will be expanded in a few major cities. In summary, we expect total net revenue in the first quarter of fiscal year 2023, March 1st, 2023 to May 31st, 2023, to be in the range of $801.8 million to $822.7 million, representing year-over-year increase in the range of 53%-57%. As the profitability we recorded year to date has reaffirmed our success and dedication in turning a new page, we're also confident in achieving a satisfactory operating profit level in the full year of fiscal year 2023.

To conclude, we are now taking multi-pronged operational actions to accelerate our recovery and anchor sustainable growth. Simultaneously, we will cautiously research and unveil the potential in new market opportunity and try to apply new technologies such as AI and ChatGPT into our education and product offerings with a vision to uplift our innovative capability in pursuit of profitable growth and increasing the operating efficiency. We stay committed to seek guidance from the corporate with the government authorities in alignment with these efforts to comply with the relevant policies, as well as to further adjust our business operations as required. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measures, as well as the current and preliminary view, which is subject to change. This is the end of our fiscal year 2023 Q3 summary.

At this point, I would like to open the floor for questions. Operator, please open the call for this. Thank you.

Operator (participant)

Thank you. The Q&A session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. To ask a question, please press star one one on your telephone keypad. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Our first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Felix Liu (Executive Director and Equity Research Analyst)

Hi. Good evening, Stephen and Sisi. Congratulations on the very strong results. My question is on your forward-looking guidance for the 4th quarter. I know the year-on-year growth looks very impressive. May I know what are the key drivers or the good performing business segments that are driving the 4th quarter growth? If we look at slightly beyond the next quarter for the next fiscal year, what are the business segments that you expect the fastest growth in FY 2024? Thank you.

Stephen Yang (Executive President and CFO)

Okay. Thank you, Felix. You know, I think we remain the confident and optimistic about the business performance in the Q4, the first quarter and the new fiscal year 2024. You know, firstly, I think the macro trend of the economy recovery as the pandemic subsides, you know, where we're seeing the people rebuild their confidence in consumption, you know. We're also seeing our the products and and the demand, you know, the requirement of the service is gradually increasing. As for the different business lines, you know, the remaining business such as the oversea related business, on demand side, we have seen the strong demand for oversea test prep and consulting business.

On supply side, you know, we have seen some players disappear from the market. That means we're facing less competition. That's why we're optimistic about the overseas related business going forward. For our new business, the encouraging performance in the Q3 in this quarter and even the last couple of quarters have shown that we're heading towards the right direction. We believe the business will be able to maintain the very strong top-line growth and generates more profit to the whole company.

That's why we guided the very strong top line growth in Q4 to be in the range of 53% to 57% in dollar terms. You know, if you translate into RMB terms, that would be much more higher. As for the bottom line-wise, I think we're confident in achieving the greater operating profit even in the Q4 and the new year. Next year, I think the key growth driver will be the number one. If I run them, the number one should be the new business. You know, we started the new business, such as the dynamic courses since, you know, 15, 16 months ago, and it's grows very fast in the last in this year.

Also, we believe next year the growth rates will be very high. Sisi, wanna add something?

Sisi Zhao (Investor Relations Director)

Just one thing, that if you look at Q4's guidance, because if you look at historically, last year, since Q4 is the first, very first quarter that we terminated the K-9 academic tutoring. That's the first quarter to be like for like increase. That's why you compare with previous quarters, the growth rates is higher.

Stephen Yang (Executive President and CFO)

Yeah.

Sisi Zhao (Investor Relations Director)

Mm-hmm. Okay.

Stephen Yang (Executive President and CFO)

Thank you, Felix.

Felix Liu (Executive Director and Equity Research Analyst)

Got it. That's very clear. Thank you.

Stephen Yang (Executive President and CFO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Lucy Li from BMO. Please ask your question, Lucy.

Lucy Li (Director of Data Analytics and Governance, Capital Markets)

Hi, Stephen and Sisi. This is Lucy from BMO. I have one question on Dongfang Zhenxuan. If we're looking at the minority interest, it seems that the net profits for Dongfang Zhenxuan has decreased Q-on-Q. Could you please elaborate the reason behind that, and how should we think about the earnings contribution from Dongfang Zhenxuan going forward? Thank you.

Stephen Yang (Executive President and CFO)

I think during this quarter, the East Buy has proved itself as a successful business model. You know, this business contributes to offer the remarkable contribution to the company overall revenue and profit margin. You know, this quarter, East Buy continued to invest the substantial resources in improving the product quality and collaborates with the JD and the SF Express to provide better delivery services. Yeah, they invested some money. But I think I can't tell the detail of the margin analysis or the profit analysis because of the compliance. You know, I think next quarter, the Dongfang Zhenxuan management, East Buy management will share with you guys more information in detail. Thank you, Lucy.

Lucy Li (Director of Data Analytics and Governance, Capital Markets)

Understood. Thank you, Stephen.

Stephen Yang (Executive President and CFO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Candis Chan from Daiwa. Please ask your question, Candice.

Candis Chan (Equity Research Analyst of China Internet and Education)

Great. Hi, Stephen and Sisi. Thank you for taking my question, and congratulations on the very strong set of results. My question is related to the new businesses. Firstly, may I know the rough breakdown of our new initiatives revenue? My second question is about the longer term business directions going forward. As now we see that our business has become more diversified, not only East Buy has done very well, even for New Oriental Livestream channels on Douyin also see very decent GMV trend. Founder, Yu, Michael also like talked about to enter into the cultural tourism as well.

I just wondering, like, what will be the key development areas for New Oriental in the following years, and I would like to know more about whether we have any plans to enter into the learnings device market as well or some other new areas? Thank you.

Sisi Zhao (Investor Relations Director)

Okay. As for the new initiative, education, nature new initiatives, actually if you look at the revenue contribution, the biggest one is the non-academic tutoring. This, this is the one that we're using our existing teaching resources and, you know, developing the content very, very quickly, and also use our own existing channels to get students. This year is the actually the year one to largely develop this new kind of initiatives. We're seeing that the demand is very strong and also the retention and also the operating data are trending towards a very good situation.

Also we're confident for this business to continue to grow very nicely and also contribute more and more meaningful revenue and also get very good profitability as well. Also the second biggest education nature new initiative is the intelligent learning device business. Also this is a good way to have students to do the self-study using our technology, get access to our teaching system using the hardware learning machine. This is also something very new and is a new model and new product, but also gaining a lot of interest from our customers. We're also using our existing channel, like all the local schools and learning centers to roll out these new products.

Also getting satisfactory retention and renewal of tuition fees. Also this is a business that we are also feeling confidence to contribute more and more revenue and also have good profitability as well. Next to these two. Actually, these two already contribute vast majority of our educational new initiatives. We do have confidence in several other ones like the study tour business, campaign business, which actually have some negative impacts during the pandemic period, the last one year. We're confident for the future for this new initiative because the high demands we're seeing from local markets, and also we also have very strong resources to develop this new business.

Together with several other ones that we have mentioned on the call. We keep making efforts on developing all these new initiatives, and hopefully all these directions can are all all right and also contribute more and more meaningful revenue and profit. Okay.

Stephen Yang (Executive President and CFO)

Yeah. Let me answer your last question about the cultural tourism. You know, I think some of you may have read the online that Michael said that we're considering the expanding the cultural tourism business. I think it's indeed a big potential in the country. As you know, we do have a lot of teachers. Some of them are star teachers. I think going forward, by leveraging our teachers' knowledge in general studies, cultural studies, and history, I think we believe we'd be able to offer a one of a kind cultural tourism offering.

You know, combined with the entertainment and the educational, the cultural education for all age groups, the kids, the college students and the some, you know, like the old people, right? For all ages. In addition, I think we may also be able to leverage our distribution channel like Dongfang Zhenxuan, East Buy, and the other online streaming channels, you know, within the company. Also, you know, we do have a lot of, lot of schools and learning centers as the distribution channel for the new business. But now we're still at a very early stage of the planning and evaluating the new business at the moment. If we have any updates, we'll keep you updated. Thank you.

Candis Chan (Equity Research Analyst of China Internet and Education)

That's very clear. Thank you.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone keypad. Again, to ask a question, please press star one one on your telephone keypad. Our next question comes from the line of Linda Huang from Macquarie. Please ask your question, Linda.

Linda Huang (Head of Asia Consumer Research)

Hi, management. This is Linda Huang from Macquarie. My question is quite simple. My key question is regarding for our cash because I still see that we still keep piling up the cash and our, the operating cash flow generation ability is also quite strong. In addition to the share buyback, have we think about use the other way such as like a special dividend return to the shareholder? That would be the first one. The second question is regarding for our, the, non-academic tutoring business. Since you just mentioned about that, right, we also seeing very good retention rates. What is this retention right now, and how does this compare to the regulation period? Thank you.

Stephen Yang (Executive President and CFO)

Thank you Linda. You know, as you know, we announced $100 million share buyback program last year. Till now, you know, we purchased $157 million from the open market to repurchase the share back. You know, I think our thinking is about evaluation. At this time, you know, we choose the share buyback. You know, historically, sometimes we bought the share back. Sometimes we pay the special dividends. This time the share buyback. Next time, I think it depends on the decision made by the board of director next year. The retention rates for the non-academic course.

I think for the non-academic tutoring, the courses, the retention rate is over 70% in this quarter. you know, so they were driving up the retention rate, you know, compared to before. for the intelligent learning system devices, you know, I suggest you're using the renewal rate. It's over 60% already. Thank you, Linda.

Linda Huang (Head of Asia Consumer Research)

Thank you very much.

Operator (participant)

Thank you. Next, we have a follow-up question from the line of Candis Chan from Daiwa.

Candis Chan (Equity Research Analyst of China Internet and Education)

Yeah.

Operator (participant)

Please go ahead, Candice.

Candis Chan (Equity Research Analyst of China Internet and Education)

Great. Hi, Sisi and Stephen. I just want to follow up on the profitability, 'cause you just mentioned for new businesses, actually they are now contributing very strong revenue and also the good profitability. Can you share a little bit more on the margins of the new businesses, particularly for the non-academic tutoring or the intelligent devices? Thank you.

Stephen Yang (Executive President and CFO)

Yeah. I think the new business. Overall, the new business, the margin is over 10% already. You know, we started business at the, just, 15-16 months ago, so it's a quite new business. But, you know, we, as we said, you know, we made cautiously about the new investments of the new business. It takes less time to make profitable for the new business. Though I think we are, I think we expect the margin of new business will going up, will go up in the Q4 and the next the new year. Next one. That's okay? Is it clear?

Candis Chan (Equity Research Analyst of China Internet and Education)

Yep. That's, yep, that's very helpful.

Thank you.

Stephen Yang (Executive President and CFO)

Thank you.

Operator (participant)

Thank you. Our next follow-up question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Felix Liu (Executive Director and Equity Research Analyst)

Thank you management for taking my question again. I just wanna have a follow-up on the, you know, the market landscape of non-academic tutoring. I know we have most of our revenue coming from the top 10 cities. Where do you see as the biggest growth opportunity ahead? Do you think it's more about ramping up our market share in existing top cities, or do you see, you know, a lot of opportunity in other cities, especially lower tier cities for non-academic tutoring? Thank you.

Stephen Yang (Executive President and CFO)

I think as I said, you know, we're seeing the less competition for the non-academic tutoring business. Actually, we're taking market share in both the top-tier cities and the low-tier cities. Go forward, I think almost all the cities, the growth will be fast.

Does Sisi you want to add?

Sisi Zhao (Investor Relations Director)

Oh, yeah. actually now we're seeing the top 10 cities contributing like over 60%.

Stephen Yang (Executive President and CFO)

Yeah.

Sisi Zhao (Investor Relations Director)

Of overall revenue for this category. I think the growth will come from both taking continued expand and taking shares. You know, it's very, very early stage for this kind of new services and also the new market. We definitely have opportunity to take market share in all the existing cities, especially these kind of major cities, top-tier cities. Also, our feeling is that the demand for this kind of non-academic tutoring is not only for higher tier cities, but also like all the existing cities we're in.

Like around 70, 80 cities that we still all have all the schools and learning centers, we use our existing educational infrastructure and also leveraging, keep leveraging our brand name, educational brand name. We have the advantage to expand this kind of new business. The demand is very high.

Felix Liu (Executive Director and Equity Research Analyst)

Okay. Got it. Thank you.

Stephen Yang (Executive President and CFO)

Thank you.

Operator (participant)

Thank you. Once again, to ask a question, please press star one one on your telephone keypad. To remind you, to ask a question, please press star one one. It's star one one for questions. All right. Thank you. We now approach the end of the conference call. I will now turn the call over to New Oriental's Executive President and CFO, Stephen Yang, for his closing remarks.

Stephen Yang (Executive President and CFO)

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you.

Operator (participant)

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.